Herbalife Millionaire Member Provides Restructuring Tell

Summary

In particular they are going to extraordinary measures to get members to choose preferred status.

I believe the extraordinary measures taken also provide insights into expectations for the business.

Another S.A. author Sunil Shah put out an article recently with an interesting little tidbit indicating a high level Herbalife (NYSE:HLF) team member is using Facebook to convince the rank and file they are required to declare as Preferred members if they have no customers.

Hey Team!

If you do not have customers Herbalife is requiring you to switch be a Chartered Preferred member!

***If you do switch and get a few customers you can switch back to being a distributor***

You will get $25 credit until January 30 th.

This is Herbalife rules! Let us know if you need help! Tag your team please!

As as anyone following the HLF saga knows they agreed to a settlement with the FTC last year and in doing so signed a consent decree requiring them to restructure the business to ensure the majority of sales are to actual retail customers. To put this in context, HLF skeptics (count me in) claim there is no significant natural demand for their shakes and the vast majority of product sales are coerced consumption from business partners trying to advance in a get rich quick pyramid scheme. Their supporters claim the opposite: that the vast majority of sales are to actual retail customers.

By HLF’s (and all MLM’s) own disclosures the vast majority of business partners make no or essentially no income. HLF has a convenient explanation for this, suggesting that the vast majority of its business partners are not in fact business partners at all – they are customers looking for the business partner discount to buy products for their own personal use. The consent decree restructuring seeks to address the issue of real retail sales in two basic ways.

First all members must choose one of two basic categories: Preferred Customer or Business Opportunity Seeker. Preferred customers cannot participate in the reward system (climb the pyramid) and are only incentivized to buy for their own personal consumption. Business Partners can participate in the reward system and can recruit down line but are severely limited in rewards for personal consumption. The second basic restructuring requirement mandates that business partners collect receipts and get customer information to prove that there was an actual retail sale before the BP is eligible for a reward.

It is the requirement to separate members into preferred (non pyramid participants) and business partners (pyramid participants) that I believe has interesting ramifications for the Facebook announcement re-posted at the start of this article. To understand this I go to another recent article by Gary Milne where he makes a very compelling case that HLF is going to extraordinary measures to ensure the number of people signing on as preferred members is consistent with their past disclosures that ~86% of members are not in for the business opportunity but only for self consumption.

In the articles I cited and the commentary on them the focus has been on HLF needing to save face and possibly stay out of legal jeopardy as motivation for going to extraordinary measures to ensure they sign up ~400K preferred members in order to be consistent with the ~86% self consumption disclosure. At the end of Sunil Shah’s article there is a comment with a link to yet more evidence HLF is using informal channels to get help from membership in hitting target numbers consistent with past disclosures.

To recap, we have evidence that HLF is using informal channels to coerce members to sign up under the preferred (non pyramid participant) category which is a violation of the intent of the consent decree (thus the use of unofficial informal channels) in order to validate past non financial disclosures. One aspect of this that I haven’t seen discussed is the fact that from a purely business oriented perspective they should be doing the exact opposite and trying to get as many members as possible to choose the business opportunity path so that they can preserve the ability to be rewarded for selling to others. They’re already eligible to participate in the business opportunity and will continue to be eligible by default if they don’t make a choice. Why on earth would the company actively try to prevent most of their business partners from being able to continue to participate in the opportunity?

In my opinion this situation provides an interesting tell into management’s expectations for the business. They are clearly prioritizing hitting numbers that will be consistent with past non financial disclosures at the expense of rational business practices. However if there is one thing MLMs excel at, it’s creative narration. I am sure if the business model restructuring were only going to result in manageable disruptions and declines they would have been able to figure out a creative explanation as to why it turned out that significantly fewer than 400K members signed up for preferred status. In my opinion the prioritization of validating past non economic guidance over sound business practices suggests they know the restructuring is going to have a huge impact on the business and that they’re going to need answers to a lot of questions. In other words, explaining away not hitting a non financial metric of 400K preferred members would be child’s play to these guys if the underlying business took only a manageable hit in the restructuring. It gets a whole lot harder to explain if the underlying business is going to take a big hit.